Sample Checklist for Position Entries

[StreetCoup 10]

Opening a new trade is generally less complicated than closing it. Technical hurdles aside, you will most likely find it easier to enter a new position with a fresh approach, than dealing with uncertainties inherent in financial markets when already in a position. You might choose to hold on, or doubt your target, and altogether clutter your decisions with second thoughts.

 

The relative easiness does not liberate you from proceeding with great discipline and care because the entry decides upon the outcome eventually. The entry decides whether you will be enjoying a smooth ride, or getting yourself into trouble. When, where, and why you open a position should depend on your own tactics, but there are a few criteria which apply to all traders.

 

Support and resistance levels: Be especially aware of potential S&R levels which can be horizontal or in the formation of obvious trend lines. This is your preparation work. Without it, you are clueless about what is happening in the market. It is not an exact price, but more an approximate level which is visibly identified in recent price action. I generally find the 4H time frame best for instruments which trade around the clock such as futures or currencies. The 1H time frame works better for stocks that have their regular trading hours.

 

Identify areas where buyers or sellers gained or re-gained control. In any case you are buying into a downtrend with the ambition of trading a turnaround, look closely at what happens near former support areas. They can pose a threat to bullish traders by acting as resistance.

 

Large Version: http://www.streetcoup.com/wp-content/uploads/2011/12/trendlines.png

 

The reaction: Once you know where the support or resistance is, watch how price reacts at those levels. Do not blindly buy or sell into it. Observe price action closely instead. If the price is visibly moving down below resistance or even breaking support zones in the process, you have your short entry. A long entry is at hand if the market is rallying up from support and breaking resistance areas.

 

Stop-loss order: Stops are placed right after the entry to protect your equity and limit the maximum potential loss. In a short position, it is commonly placed above a recent peak, or below the recent trough for a long position. By gradually adjusting your stop after each minor pullback, you are effectively securing more and more profits. There is no need to look for target areas unless your strategy is based on different methods from trend following.

 

 

Always expect the opposite of your plans to materialize, and plan accordingly. By doing so, you automatically minimize the risk and maximize the potential.

 

For example when you enter a trade, you obviously hope that it will be profitable. Do a mental switch: You have to fear that the market will go against you instead. This will make you respect risk and set a protective stop at all times.

 

On the other hand, when you are in a good trade and consider to close it with each pullback, you have to be greedy and hope for it to turn around in your favor. This will prevent unwanted emotions from taking over your trading decisions.